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Introduction
Category management is the grouping of same or similar products and brands that perform the same or closely related functions. As a retail brick-and-mortar or e-commerce entrepreneur or manager, you have a vested interest in the performance of your offline and or online store’s category management strategy and tactics. The tools at your disposal will vary alone the sophistication spectrum. However,
your primary goal will still be to place your consumers' needs and convenience at the core of your category management design. Whether you are a pure convenience store, a specialty store, a destination store, a limited assortment store, an extreme value store, a conventional grocery store, an ethnic-oriented grocer, a bookstore, or an electronic retailer, what should dictate your business model is your approach to category management. Whether you use the concept of trip management, aisle management, or customer relationship management, your core business goals should not change. The simplicity or complexity of your strategic plan may vary. Your preferred option for tactical execution may also vary. The market and the consumers you serve may be unique. In all cases, the business fundamentals almost always remain the same in all sectors of the retail industry. As a retailer, you will generate lots of transaction data. You will generate lots of data in procurement and in sales. To perform at the highest level, you will need a system for granulating the transaction data you generate and for re-integrating them back again so that you can gain appropriate actionable insights that will help you design and monitor your business key performance indicators (KPI). In setting your business goals, and in making business decisions, your overarching aim must be to out-think your competitors so you can out-sell and out-perform them. In designing and deploying your category management strategy, you will need imagination, a solid strategy and be savvy in your product assortment design. Understand that the consumer of today is extremely nit-picky and tech-savvy. Traditional customer loyalty to a store or brand is dead.
In designing an effective and efficient category management strategy and tactics, you will need to deploy the 8-step process explained in this article. As there is no one-size-fits-all category management process, it is inevitable that you customize the steps to suit the peculiarities of your market segments and the customers you serve. How you design your category management process will bear heavily on the volume of traffic to your store, the basket size at each trip, your overall sales volume and aggregate profit of your retail business.
1. Define your product assortment categories:
Category definition is the first and very difficult step in assigning products to categories. There is more than one school of thought on the subject of category definition. Manufacturers prefer to define categories on the basis of what they manufacture; retailers may want to define categories on the basis of how they manage their purchasing function, or on the basis of their consumer buying profile. It is not uncommon to find that manufacturers like Nestle, Proctor and Gamble, Unilever find their category definition different from that of their retailers. As a retailer, your category management process should be customer-driven. Focus your definition on how your customers buy and not on how you would prefer to sell. Pay attention to your consumer shopping behavior and their buying patterns once they are inside your store. Understand that there is no standardized category assortment definition pattern that incorporates all the classic 8-steps and in lockstep with how they are listed below. Do not copy your competitors just for the case of being like one of them. Be guided by the actionable insights you gain from shopper-movement inside your store and by your store’s transaction data. For instance, should your healthcare product assortments contain both shampoos and perfumes? Should shampoos go together with body lotions in the skincare category? Should perfumes belong in the beauty category or should it have its own product assortments category? Should wine and spirit go together in one category? Another definition is to base your category definition on the basis of frequency and the number of efforts and thought that go into your consumer buying decision. In this respect you could have the following as a broad category definition format:
Convenience products: these are products that require minimal efforts and thought before a purchase is made. They are usually everyday products like toilet papers, dishwashing liquids, cereals, beverage drinks, and some grocery items like egg, bread, etc. Convenience products have little to no price differentials. Consumer spending is the highest in this category. Brand proliferation is also a common feature of convenience products.
Seasonal products: there are two categories of seasonal products. Some categories are available only during certain seasons of the year, like autumn and winter, or spring and summer, and other major holiday seasons like Christmas, New Year, or special events like the world cup, and super bowl. Others are available year-round but fluctuate in demand and price. White and red wine are typical examples of seasonal products that are available in all seasons but with fluctuating demand. Your customers will not stop purchasing wine altogether but may likely switch from white to red and later back to white again, based on the season of the year. For instance, chilled white wine goes better with cold chicken during the winter or cold weather, and warm red wine is usually paired with roast lamb and turkey during the summer period.
On the other hand, some products are superb seasonal products, like winter apparels and accessories during the winter seasons. Swimming outfits during summer, starting from June, peaking in July and dipping after August, with an also nil demand between October and December.
Specialty products: these are products that consumers will make out time and effort to seek out and buy. They may even be willing to travel far distances to purchase them. Specialty products are not necessarily more expensive but to a consumer seeking them, these products have some special appeal or characteristics she desires. A consumer who seeks a specialty product or brand will not easily accept a close substitute, even if such a product or brand is cheaper. An example is a Heineken lager with 0.0% alcohol content. A close substitute with 0.5% alcohol may not be purchased by the same buyer, even at a cheaper price. Compared to similar products and brands, specialty products and brands have stronger customer loyalty.
2. Your category role assignment:
As part of your category management strategy, you should decide the role each of your major product category will play and the appreciate strategy to deploy. For consumer-based products, consider the following four category roles:
Destination category role: with this category, you want to position your store, whether offline or online as the preferred destination for your target consumers. You want to be a primary provider of consumer products of choice with consistent and superior value delivery. Your value proposition will include items that your target customers will use words and phrases like “superior value”’ and “best selection” to describe.
Routine category Role: here your focus is on the everyday needs of your target consumers. The products in your routine category must possess the characteristics of being consistent, competitive, of high value and of a memorable experience. The routine category is used for the building of transaction volume and not necessarily profit maximization.
Seasonal category role: this is a product category that stocks products of a seasonal nature. They are not primarily an all-year-round profit source for your store brand. You must also aim to stock high-value products of choice during seasonal periods like Christmas, Easter and other holiday periods.
Convenience category role: these are products that are easily sorted and found on routine shopping trips. Your goal is to provide a broad range of products that will characterize this category as a one-stop-shopping category. Convenience products are also profit in enhancing products.
3. Appraising your various categories:
A category is an assortment of products with the same or similar functions. A product assortment category like Dentalcare may contain products like toothpaste, toothbrushes, mouthwash, denture fixatives, denture cleaners, and dental floss. How did the sale of Aquafresh toothpaste brand compare with the sale of Wisdom toothpaste? How did the sale of Aquafresh toothbrush compare with the sale of Wisdom toothbrush? How did the sale of Listerine mouthwash compare with the sale of Colgate mouthwash? Within your category management plan and compared with your competition, you must appraise the performance of your various products and the category you placed each item. Then you must also appraise the aggregated performance of each category against other categories. How are the prices of the items? What promotional efforts were expended? How about the placement of each item within a category and the location within your store where each category is placed? These are some of the questions you must ask? And the source of your answer will be derived from your POS transaction data. Fortunately, there are now available routine off-the-shelf software you can purchase to answer these questions and that will afford you the insights about your store’s performance.
4. Your category scorecard:
In evaluating your retail store category management scorecard, the key components to focus on will include the following:
- Your retail store strategy
- Your category management and segmentation process
- Your retail sales analytics
- Your store category plan and your assessment of how successful you have been in the execution of your plan.
These four key components constitute the basis for evaluating how successful your category management plan has been. They will also help you set course corrections going forward.
Also, on a much more granular level, you may drilling down to determine each category’s performance in terms of sales turnover, gross margin, profit contribution per item per category, inventory turnover per item per category, and even gross margin return on investment, gross margin return on floor space, gross margin return on shelf space, and other metrics that you have determined are important to you.
5. Category strategy
Your category strategy will determine the purpose to be played by each category role. The main purpose of your category strategy is to fine-tune and grow your market, increase your sales, enhance more footfall traffic into your store, ensure adequate profit margins, return on investment, achieve a higher basket volume and customer experience and satisfaction. Design your category role to combat competitive threats, and use them as segment opportunity creators. The drivers of your strategy must include your desire to enhance customer transactions, defend of your turf, improving your brand image, while at the same time building traffic for your store.
Traffic building should be designed to increase the footfall in your store. Transaction building should ensure increase customer basket size, in relation to sales and profit generation, cash generation from frequent purchases. Excitement generation by increasing the interest and enthusiasm of your customers through the implementation of your unique total customer experience, turf defending by making you stand out competitively against your competitors.
6. Category tactics:
Having decided the category management role of each of your product categories (destination role, routine role, seasonal role and convenience role), you must also have determined the specific strategy of each category role before embarking on any specific tactical actionable steps you must take so that you can meet the specific objectives of each of your product assortment category role. Your tactics must be based on the following 4p’s of marketing: product assortment, your pricing strategy, your category promotions, and your merchandising placement.
7. Plan implementation:
Your implantation plan is the use of your tactics to achieve your strategies. The success of your category management strategy will depend on how effectively you deploy your tactical plans. Plan implementation is synonymous with execution. It is at the execution stage that the rubber meets the road. Most plans fail to deliver because of flawed execution. It is better to have a superb execution and an average plan to have an average execution of a superb plan. It is at the execution stage that you have to manage many moving parts as retail is detail. There must be complete buy-in from the chief executive all the way down to the shop floor staff.
8. Review and assess your category performance:
Reviewing and assessing your category performance is a task that must be performed periodically, preferably quarterly. The metrics that you may use are almost the same as you used at the category scorecard stage. The more the frequency you execute your store and category review, the earlier you are able to minimize the deviation of your plans from what is actually happening and thus effect corrections.
At all times, bear in mind that retail is a detail-oriented business. In today’s retail environment, margins are thin and errors could delay the best-designed category management process. Invest and understand how to deploy retail store analytics software as an essential aim for gaining actionable insights about what you are doing and how you can do them even better.
